I’m Professor and Chair of the Department of Economics at LIU Post in New York. I’ve published several articles in professional journals and magazines, including Barron’s, The New York Times, Japan Times, Newsday, Plain Dealer, Edge Singapore, European Management Review, Management International Review, and Journal of Risk and Insurance. I’ve have also published several books, including Collective Entrepreneurship, The Ten Golden Rules, WOM and Buzz Marketing, Business Strategy in a Semiglobal Economy, China’s Challenge: Imitation or Innovation in International Business, and New Emerging Japanese Economy: Opportunity and Strategy for World Business. I’ve traveled extensively throughout the world giving lectures and seminars for private and government organizations, including Beijing Academy of Social Science, Nagoya University, Tokyo Science University, Keimung University, University of Adelaide, Saint Gallen University, Duisburg University, University of Edinburgh, and Athens University of Economics and Business. Interests: Global markets, business, investment strategy, personal success.

Franchise Industry: How McDonald's And Yum Brands Beat Wendy's

Franchise chains, a form of “collective entrepreneurship” that allows its members to share the risks and rewards associated with the discovery and exploitation of new business opportunities, has been a popular investment concept in Wall Street. And for a good reason: They’ve delivered superior returns to investors.

McDonald’s, Yum BrandsYum Brands, Dunkin Brands (NASDAQ:DNKN), Wendy’s and Burger King (NYSE:BKW) are a good case in point—they all beat the S&P 500.

But as is the case with other investments, not every franchise is successful. And even among successful franchise chains, some fare better than others. McDonald’s and Yum Brands, for instance, have fared much better (in terms of equity performance) than Wendy’s.

What makes the difference? Four factors:

1.The Right Business Concept—the way a chain enhances customer value vis-à-vis the competition. Franchise pioneer McDonald’s, for instance, delivers a quicker, more convenient and less expensive meal, compared to traditional restaurants–Wendy’s is doing something similar. KFC offers the same meal attributes, but with a different menu—focusing on chicken rather than hamburgers—though both chains broadened their menu portfolio overtime, adjusting it to the local tastes.

Dunkin’ Donuts offers coffee and a variety of breakfast items (and in recent years ice-cream) to go at convenient locations.

2. Scale– Cost savings associated with a larger production scale of a standardized menu – the bigger the production scale, the lower the cost per menu. With 33,510 units around the world, for instance, McDonald’s has a scale advantage over Wendy’s, which has 9,792 stores; and so is Yum Brands with over 30,000 stores when KFC and Pizza Hut are combined.

The scale advantage is reflected in the operating margins of the two companies. McDonald’s and Yum Brands enjoy 30.12% and 15.05% operating margins, versus 7.38% of Wendy’s.

Company

OperatingMargins (%)

Return on Assets (%)

Qtrly Revenue Growth (yoy)

Qtrly Earnings Growth (yoy)

McDonald’s

30.13

15.42

0.90%

0.30%

Burger King

31.95

6.17

-42.50

150.3

Wendy’s

7.38

2.72

1.80

-82.7

Dunkin’ Brands

39.23

5.22

6.20

-8.30

Panera Bread

8.22

15.64

12.70

16.80

Yum Brands

15.05

13.80

-8.30

-15.10

Source: Yahoo.Finance.com

3. Scope— The cost savings associated with offering different products by a single corporation rather than by different corporations. McDonald’s and Panera Bread, for instance, offer a variety of products for sale (McDonald’s has added Mccafe in many locations), vis-a-vis Wendy’s and Dunkin’ Brands. That can explain the higher return on assets.

4. Location—The benefits associated with occupying primary location sites for franchise stores. In fact, location can support and reinforce all these advantages. As an older franchise McDonald’s, for instance, had the opportunity to pick best locations with favorable leases. This further explains both its hefty operating margins and the high return on assets.

The bottom line: Concept, scale, scope, and location make a big difference in the franchise world.

Post Your Comment

Post Your Reply

Forbes writers have the ability to call out member comments they find particularly interesting. Called-out comments are highlighted across the Forbes network. You'll be notified if your comment is called out.

McDs consistent within a region. The others are inconsistent. Every TacoBell has a different idea what a cheezypotato burrito is. Every Wendys has a different idea what a double cheeseburger is. Burger King used to advertise and practice “Have it your way” which McDs has never been able to provide. Twenty and Thirty years ago, Burger King was great at giving you what you ordered. But increasingly they try to imitate McDs and allow for no variance in order. BurgerKing should have stayed with being the non-McDs market segment.

The article outlines the upside to ubiquity, but it ignores the downside.

Success is essentially its own governor, it’s own negative feedback.

WalMart cannot put new stores into existing towns without cannibalizing existing sales. Cannibalization looks almost profitable but it didn’t work out very well for Starbucks. You can open more stores but if your new sales are stealing existing sales, then over-all profits go down.

Another thing that helps is being a large second in the market. For the longest time in America, people defined their families as _either_ Ford or Chevy owners. Coke/Pepsi; Apple/Windows.

Seems to me there is still a familial identity as _either_ a McDonald’s eater or a Burger King eater with no mention whatsoever of Wendy’s or KFC.

Professor: nice article, but you touch on the “Wall Street franchisor story” primarily.

The value in these businesses is not only the “asset light”, low CAPEX franchisor business model but also the franchisees, who invest in their businesses and operate, and power these brands. The franchisor is the brand steward, and must promore mutual interest, collaboration and proper brand systems in order to drive proper franchisee economic returns.

If the franchisees fail, the brand fails. Not every franchisor gets it. One of the companies you noted has lost sight of that reality.

A great Wall Street story without proper care and attention to the franchisee interests will wind up beinfg a finite, and sad conclusionary story.

Wendy’s food quality has MCD/BKW/YUM beats and now their pretzel cheeseburger is going to catch on fire. At this point in time, WEN is the better investment as they have more potential in growth while MCD is simply a safe bet if you bought it after they crashed recently.